Cyprus deposit grab is fiscal Magnitsky bill for Russia

Demonstrators raise their arms in protest as Cypriot President Nicos Anastasiades's convoy drives to the parliament in Nicosia March 18, 2013. (Reuters/Yorgos Karahalis) / Reuters

The decision by the Cypriot government to grab up to 9.9% of deposits in its banking system is the financial equivalent of the Magnitsky bill as far as the Kremlin is concerned.

"The decision is unfair, unprofessional and dangerous,"
Russian President Vladimir Putin said of the deal struck between
the German-dominated EU finance ministers meeting and Cyprus over
the weekend in Berlin.

The deal has been widely condemned by commentators, as it
undermines the very foundations of the European banking system. All
European deposits are supposed to be protected by a deposit
insurance scheme that guarantees the safety of deposits
irrespective of what happens to the bank holding it.

The reason why Europe has contemplated such an unorthodox
solution is the political problems that Germany has with using its
taxpayer money – as the bulk of the EU money will come from Germany
– to bail out Russian oligarchs and gangsters hiding money
abroad.

"The driver for the latest attempt to bail-in depositors
appears to be German politics, and concern therein that German
tax-payers’ money was likely being used to bail-out the weight of
Russian deposits in the Cypriot banking system," Timothy Ash, a
strategist at Standard Bank, wrote in an emailed note. "German
politicians seem to have adopted a very moralistic approach to the
Cypriot bail-out, which may well now reflect 'bail-out' fatigue
more than anything, plus the close proximity now of Bundestag
elections [due in September].

The Cypriot authorities have vigorously denied the allegations,
and highlighted recent multilateral reviews have given the country
a clean bill of heath in this respect. However, with the banking
sector several times larger than the size of the economy, clearly
Cyprus is keen to hang onto to its financial sector as a major
source of income.

Lack of trust

Much has been made in the press of €25bn, almost one-third of
Cyprus’ deposit base, being comprised of Russian money. But if the
bail-in haircut does go through, it will do little damage to Russia
in the short term. Ivan Tchakarov, chief Russia and CIS economist
with Renaissance Capital, estimates that Russian companies will
lose a total of $1.9bn assuming total deposits of about $19bn, or a
mere 0.15% of Russian GDP.

However, if Cyprus follows up with capital controls on the
movement of foreign money in and out of the country, the debacle
could cause losses of as much as 2% of Russian GDP, which would
really hurt, argues Tchakarov. Russian banks have extended a total
of $40bn in loans to Cypriot companies (most of which are actually
shell entities for Russian businesses) that could get caught in the
web.

Undermining the deposit insurance system is extremely dangerous
and the reason why the Kremlin is so livid. The entire banking
business is based on trust: banks take in deposits and on-lend them
to borrowers, but this system only works if depositors don’t all
demand their money back in cash at once. The deposit insurance
system was established to provide extra reassurance to depositors,
so to undermine it threatens the very foundation of the entire
European banking sector.

The EU officials made it clear that this was a "one-off"
solution and would not be repeated in other countries, leaving the
Kremlin with the impression that the bail-in deal is another
example of selective legislation specifically designed to punish
Russia.

Indeed, the legality of the deposit grab is already being
questioned. "I would be surprised if some Cypriots do not try
and test this all in the European courts – assuming that the
Cypriot parliament does not throw this out this week, which seems
quite a high probability in my mind," says Ash. "It seems
bizarre that different conditions are being imposed on Cyprus to
other bail-outs recently rolled out across the Eurozone… And
incredible by such a move that the Troika [European Commission,
International Monetary Fund and European Central Bank] seems
willing to jeopardise the sanctity and standing of EU deposit
insurance schemes, and at a huge potential risk of a broader loss
of confidence in banking systems, and indeed the European crisis
resolution system [for only around €7bn saving in bail out
costs]."

Last year the US Congress passed the so-called "Magnitsky Act",
which imposes travel restrictions and freezes US assets of any
Russian officials implicated in the death of campaigning lawyer
Sergei Magnitsky while in pre-trial detention in 2009, and involved
in any other human rights violations and corruption.

The bill is supposed to give the US government putative powers
against human rights abusers, however it has only been applied to
Russian officials. Especially galling for the Kremlin, newly
appointed Secretary of State John Kerry was in Uzbekistan last week
to renew the US' friendship with the Central Asian dictatorship,
despite that country's far worse record on human rights.

Financial markets were in uproar on Monday, March 18 as
investors fled to safety. All eyes are now on Cyprus' parliamentary
vote, where the government probably has enough votes to see the
bail-in through, according to reports.

Investors' fear about contagion is back with a vengeance, with
financials leading the biggest declines as risk appetite for these
stocks has been dented massively.

If the Cypriot levy comes into effect, then there would be a big
disincentive for depositors in any of the troubled countries on the
periphery of Europe to keep their money in local banks, as it's
clear the EU now has the power to grab savings to rescue struggling
banks while leaving senior bank bondholders untouched. Undermining
the trust in the already wobbly banking sector, especially if
motivated by short-term political goals, is profoundly
irresponsible.

The question everyone in Europe is now asking: who will be
next?

Ben Aris for RT

Ben Aris is the editor-in-chief
of Business New Europe (bne.eu).

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.